Four Things to Consider Before Investing in Real Estate

Real estate agent and investor shaking hands
Real estate agent and investor shaking hands

As more people look for a safe place to put their money, the housing market is becoming an increasingly viable option. This is due to the fact that real estate generally increases in value over time, so people can trust that they’ll make a good return on investment. However, before you join the flock of people eager to become property owners, here are a few things you should consider.

1. Income stability

Investing in real estate is a huge financial commitment and it can take some time before you start earning returns. For these reasons, a stable income is a necessity when venturing into real estate. Before purchasing a property, you’ll want to assess your finances. Are you currently operating with surplus funds? How stable is your income? What are the chances that your income will remain the same or grow within the next six months? These are all questions that will help you determine if you can afford to become a property owner. This will also help you determine whether or not you can survive the sometimes-challenging period between the purchase and the sale/lease of your property. If you’re in good financial standing and have a secure source of income, you may be ready to start investing in real estate.

2. Your credit score

It’s common knowledge that most people will need to secure a mortgage to become property owners. However, before you apply for a mortgage, you’ll want to make sure you have a favourable credit score – a minimum of 640. Your credit score determines the type of mortgage you’ll be approved for and the amount of interest you’ll be required to pay. A few points up or down on your credit score can make thousands of dollars of difference in your yearly interest payment.

3. The state of the real estate market

Before investing in real estate, you’ve got to do your research! Track the housing prices in your city/area of interest. Are they going up or down? If real estate prices are on the decline and there is a surplus of properties, that means a buyer’s market and a great time to make a purchase. On the other hand, if prices are on the rise and there are more potential buyers than property on the market, then it may not be the best time to invest. Knowing the current and forecasted state of the real estate market will help you invest at the right time, thus increasing your chances of success.

4. Types of property

Just as there are different sectors of the real estate industry, there are different types of real estate property. You can invest in everything from residential to retail and commercial real estate, and each come with their pros and cons. For example, owning residential property is the safest bet when it comes to real estate investing. Since shelter is a basic need, you’re more likely to find tenants for your property – allowing you to generate rental income. Before venturing into real estate, you should have an understanding of the types of property available, as well as their benefits and drawbacks. This way you’ll know what you’re in for when you choose to invest.

Real estate investing can be a rewarding venture, and that’s especially true when you take these four key points into consideration before making a purchase.

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15 Real Estate Investing Terms Every Beginner Should Know

Real estate investment home model and keys

Investing in real estate can be a tricky venture, especially when you don’t know what anyone is talking about. When you’re new to real estate investing, it seems like everyone in the industry is speaking an entirely different language, and this can be quite an intimidating experience. So, to help you feel more confident about your venture into property investing, we’ve broken down the most common real-estate investment terms in our beginner-friendly glossary.

  1. Appreciation: An increase in the value of an investment property over time. Appreciation can be caused by a number of different factors including a decrease in supply, an increase in demand and even inflation.
  2. Buyer’s market: This is a situation in the real estate market where the demand for investment properties is lower than the supply. Here, buyers can benefit from low property prices. 
  3. Capital expenditure: Capital expenditures refer to the purchases, improvements and renovations that extend the life of an investment property. These include renovating the kitchen, finishing the basement etc.
  4. Capitalization rate: Capitalization rate, or cap rate, is a formula used to determine the value of a rental property. It is found by dividing the net operating income by the current value of the investment property.
  5. Cash flow: This refers to the amount of money a property owner earns from an investment property at the end of each month. It’s the rental income generated versus the monthly maintenance expenses.
  6. Cash on cash return: This is the ratio of the annual cash flow generated by your investment property to the amount of cash invested in it. Cash on cash return is expressed as a percentage and allows investors to assess the cash flow from their income-generating rental properties.
  7. Equity: Equity is the difference between the current market value of a rental/investment property and the amount an owner owes on the property’s mortgage. As the property owner pays the mortgage off over time, their equity stake in the rental property grows.
  8. Leasing fee: This is the money paid to a property manager when they sign a lease with a new tenant.
  9. Long-term rental: Also known as a traditional rental, these are properties bought with the intention of renting them out to tenants for long periods of time.
  10. Net operating income (NOI): Net operating income is the income generated from an investment property after deducting property expenses. These expenses include property taxes, utilities etc.
  11. Rental property: This is a property that is given to occupants/tenants for use in exchange for a monthly payment (rent) to the property owner.
  12. Rental income: Rental income is the money paid by tenants to the property owner for periodic use of their property.
  13. Seller’s market: A seller’s market is one where the demand for investment property exceeds the supply. In this case, properties on the market have higher price tags which benefit sellers.
  14. Short-term rental: Short term rentals are properties that are rented out for a short period of time. These can also be referred to as vacation rentals.
  15. Turnkey property: A turnkey property is a home or apartment that has been purchased, renovated and is now ready to be rented out or sold to another investor.

Real-estate investing is significantly easier when you know what everyone is talking about, and these 15 terms are a great place to start when familiarizing yourself with the real estate industry.

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